Due Diligence Best Practices
You have just agreed to general terms and conditions with a seller of an online business, so now what? Due diligence comes next and is the most critical step in buying a business. This is going to be the stage of the transaction that takes the most amount of time, and if it isn't you are doing due diligence incorrectly.
Your goal as a buyer should be to have an even better understanding of the business than the seller. A buyer's big advantage is that they are seeing the business for the first time and therefore can see opportunities or risks that the seller did not notice. Here are a few of the best tips while doing due diligence.
1. Focus upon making a capital allocation decision rather than merely crunching data
Collecting too much data on the business will never be a hindrance, but the skill resides in knowing which data is and is not important. Do not become fixated on any specific data points, but instead try to build a mental model of the entire business and how it functions using the available data.
2. Picking the right team members
Picking the right team throughout the due diligence process is like having a football team where you play quarterback. The two most important people on your team will be a trusted accountant and a lawyer. An accountant with business operations experience will be even more valuable. Both parties should be able to help you with a tremendous amount of analysis and risk management.
3. Judge the openness and integrity of the Seller and its management
Being able to have open and honest communication with the seller is one of the largest risk mitigation factors available. Buying a business requires trust between the buyer and seller, both pre and post-close. You will want the seller to take good care of the business during the due diligence process and to stay on for awhile in some capacity post-close to ease the transition.
4. Check your assumptions
When starting the due diligence phase, do your best to remove any bias about the business or industry. Being able to remove all assumptions will allow any buyer to have a much clearer idea of the business and just how valuable it is.
5. Be transparent and ask questions
As a buyer, you will want transparency from the seller and as a courtesy a buyer should be no different. This means sharing any concerns you may have with the seller so that you give them the ability to address remaining concerns. A buyer should never feel that there is a limit to the amount of questions he or she should ask the seller because it's expected when large dollar amounts are on the line.
6. Understand the financials
It is critical to clearly understand the financials of the business as it pertains to the future success of the business post-close. As a buyer, you will need to know what data to ask for and this usually includes tax returns, the balance sheet, an income statement, access to accounting records, and a detailed list of the assets and liabilities being accounted for.